Paremoremo anyone? Cartel criminalisation on the cards

The Ministry of Economic Development (MED) discussion document released last week on cartel criminalisation is grounded in the belief that “the single intervention likely to have a significant impact on deterrence and detection is the possibility of imprisonment”. The effectiveness of all other options, even in combination, is dismissed as “likely to be relatively small1”.

The Minister of Commerce, Simon Power, although more circumspect in his accompanying press statement, noted that Australia has criminalised cartel behaviour and that “New Zealand is committed to ensuring that businesses operating in both the Australian and New Zealand markets are faced with the same consequences for the same anti-competitive conduct”.

He also said that many cartels are so big that the current fines are seen as a cost of doing business rather than a deterrent so it is time to consider “further measures”.

In our view, there are questions around whether the case for criminalisation has been made. But irrespective of whether New Zealand does decide to criminalise, the consultations provide the platform for a robust and thorough debate on the design of the current provisions, including how we define a cartel and what conduct should be exempted. Submissions are due by 31 March.

Case for criminalisation

The document provides a short cost-benefit analysis of criminalisation. It identifies the benefits as:

stronger deterrence (although the only evidence it seems able to provide to support this is that Australia has reported an increase in leniency applications since it introduced criminal sanctions)

moral condemnation (to the extent that criminalisation would lead society to take a stronger moral stance against cartel conduct)

Trans-Tasman harmonisation, and

international cooperation in cross-jurisdictional proceedings against cartels (e.g. criminality in both jurisdictions is required for procedures such as extradition).

The costs are identified as:

a chilling effect on those arrangements which have cartel characteristics but which are pro-competitive in effect (e.g. joint ventures, joint tendering). Officials concede there are real difficulties in defining the boundaries of what does and what does not constitute cartel behaviour

difficulties in obtaining convictions because of the need to establish guilt “beyond reasonable doubt” and because of the complex nature of most cartel cases. If the difficulty of achieving convictions is too high, the Commerce Commission may be reluctant to take prosecutions and the deterrent effect will be lost

the higher costs of criminal as opposed to civil investigations because of the higher standard of proof required and because the rules of evidence require better documentation of the chain of custody, and

the costs to the state associated with incarceration (not quantified but the current cost per prisoner per year is around $90,000).

Chapman Tripp comments

The fact that a distinct minority of OECD members now provide for criminal sanctions, with an even smaller number having actually used them, is a flimsy basis for criminalising conduct that is notoriously difficult to define without also inhibiting legitimate cooperation between competitors.

Currently the maximum penalty for corporates is $10 million or, if greater, three times the value of any commercial gain resulting from the contravention or, if this cannot be readily ascertained, 10% of turnover by the corporate and any subsidiaries. These amounts are not insignificant.

In practice, the commercial gain penalty (which was introduced here in May 2001 and in Australia in January 2007) has not yet been fully applied in either jurisdiction because of the long time-lag in taking cartel prosecutions to judicial conclusion. It will be applied in New Zealand should the Commerce Commission satisfy the Court or reach a settlement with one of the cartel cases it is now prosecuting. Actual application will raise the penalty’s visibility and – potentially – its deterrent effect.

The maximum fine for individuals is $500,000 and unquestionably could do with some adjustment. It was last reviewed in 1990 since when executive salaries have risen significantly. The Commerce Act also provides for court orders banning a person from being a director or involved in the management of a body corporate for up to five years. These provisions have not yet been used but are not insubstantial.

The document suggests raising the individual maximum to $5 million and, in cases of the “most egregious offending”, extending the maximum length of a banning order to a lifetime and giving the Courts the discretion to determine the appropriate penalty on a case by case basis.

These are significant penalties which, in our view, could create a sufficient disincentive in themselves without the additional threat of a prison sentence. Permanent denial of livelihood, for example, may be a greater deterrent than temporary denial of liberty. Perhaps there is an argument for trialling their effectiveness before rushing to criminalise just because Australia has.

Further, the scope for private claims for damages could be strengthened by allowing for class actions – a move which the High Court Rules Committee has already recommended to the Government and which is now under consideration. In Australia, companies found to have price-fixed are now facing billion dollar damages claims in addition to substantial pecuniary penalties already imposed.

Criminalisation

The document invites comment on what would be an appropriate prison term and suggests five to seven years. This is based on the maximum terms for offences judged to be similar – tax evasion, insider trading, money laundering etc. The maximum term for cartel convictions in Australia is ten years. Although corporations cannot be imprisoned, the MED proposes that they should also be criminally liable. Cartels are typically the product of organisational rather than individual choice and the corporation is generally the main beneficiary of a cartel. Further, the MED considers that the stigma of a criminal conviction would create a strong deterrent and that – from an enforcement perspective – there would be advantages in being able to bring simultaneous criminal proceedings against a body corporate and an individual.

The current provisions

The current prohibitions on price fixing and other collusive conduct are set out in sections 27 and 30 of the Commerce Act. Sections 31 – 34 provide complicated exceptions for some joint ventures and other special arrangements. Section 44 provides exemption for a few specific activities, such as shipping cartels. Part 5 allows the Commerce Commission to authorise cartel behaviours where there is a demonstrable public benefit but these authorisations are hard to secure and seldom granted.Authorisation was necessary for:

arrangements to establish a wholesale electricity market

agreed cost sharing to enable telephone number portability, and

agreed quality standards for electricity transmission.

Other situations where price-fixing has been held to have occurred are:

an understanding among petrol stations to discontinue free car washes, and

in Australia, an agreement that a successful tenderer would pay fees to the unsuccessful tenderers.

What behaviour should be criminalised?

MED notes that the definition of what comprises cartel behaviour “would need to be considered carefully to avoid legislative over-reach and the deterrence of pro-competitive, competitively neutral or efficiency- enhancing conduct”.

The International Competition Network has identified the three common components of a cartel as:

an agreement

between competitors

to restrict competition.

A key distinction between hard-core cartel conduct and legitimate cooperation between competitors is that cartel agreements involve the coordination of core business decisions but not the integration of business functions that would be reasonably expected to generate efficiencies, such as joint ventures...franchises and similar cooperative business forms.

share or divide markets by allocating customers, suppliers, territories or lines of commerce.

Price fixing can sometimes also relate to components of price such as limiting discounts, discontinuing a free service or imposing agreed surcharges.

Bid rigging is typically practised in markets where tender prices are commonly used for the purchase of goods and services (such as government procurement and the construction industry). It can involve bid rotation, bid suppression or making bids that are clearly going to be uncompetitive.

Output limitation agreements cap the amount that will be supplied to the market.

Market allocation schemes are agreements whereby competitors carve up the market among themselves.MED asks if there are any other categories of cartel behaviour not included in the OECD recommendations that should be criminalised in New Zealand.

The proposed test would be intention. The level of harm caused, while a consideration when determining penalties, would not determine the legality of the conduct. Similarly, ignorance would be no defence. (The document refers in this context to groups of professionals or professional associations which frequently fix prices, unaware that this is illegal. Indeed some go so far as to view price competition as a breach of professional ethics.)

But the level of knowledge required for an individual to intentionally participate in contravention of the Commerce Act has already proved very problematic for our Courts. The Court of Appeal in NZ Bus suggested that it requires the individual to have “knowledge of the essential facts” that comprise the contravention and the Court to make an evaluative assessment of those facts. Arnold J suggested a practical alternative may be to require “knowledge of a real risk of contravention”.

What behaviour should not be criminalised?

Behaviours which the OECD recommends should not be criminalised include “agreements, concerted practices, or arrangements that are reasonably related to the lawful realisation of cost-reducing or output-enhancing efficiencies”.

Examples are:

joint ventures. The term joint venture does not have a settled legal meaning in New Zealand, reflecting the fact that they can take a wide variety of forms. Joint ventures between competitors are one of the trickier areas for competition law to negotiate

franchises and dual distribution

networks (such as the ATM network used across the banking sector)

voluntary fishing quota schemes to protect sustainability

emergency rescue services agreeing to divide the country up into territories to ensure a minimum level of coverage, and

rosters for after hours’ services by doctors.

Policy approaches

The MED outlines three possible approaches to the design of the new regime:

adapting the existing prohibitions in the Commerce Act (this would minimise the uncertainty of the transition as businesses could be confident that, if their conduct is not in breach of the existing law, they will not be in breach of the new regime)

adopting the Australian offence provisions (this would fulfil the harmonisation agenda but there are known problems with the Australian law and adoption of it would mean that we would have to adopt any subsequent amendments, of which there may be several)

starting from scratch (this is the most ambitious option and, as such, offers the best opportunity of getting it right and the biggest risk of getting it wrong and of creating unintended outcomes).

Where to from here?

The document is 92 pages long, including appendices, and deals in complex legal, legislative and policy concepts. We have presented here only a partial summary of its contents. Firms will need to get to grips with the detail, and with the implications for their business of the different reform proposals.

Chapman Tripp will be happy to assist. For further information or assistance with submission preparation, please contact the lawyers featured.